Kristof: Credit card complaints on the rise

Published 5:30 am, Monday, August 15, 2005

Another creditor — a retailer — lost one of her payments and temporarily dinged her credit report. Her downgraded credit rating pushed the Los Angeles resident into the high-interest-rate category on her bank card.

When the retailer later found the payment and admitted the error, her bank card issuer refused to pull her interest rate back down from the stratosphere.

"It was incredibly unfair," said McIver. "I'm one of the good guys. I always pay my bills. I never make a late payment. But I'm suddenly facing a 24 percent interest rate because some other creditor made a mistake."

Stories like McIver's have become increasingly common, consumer advocates say. Some consumers are seeing their credit card rates jumping precipitously even when they had no late payments with the issuer of the card.

Reviewing more often

The reason, experts say, is that bank card issuers regularly review their cardholders' credit reports to see whether they have become riskier bets. Some issuers are doing this as often as once a month, compared with annually or semi-annually, as they did in years past. And if they find a change in credit history, the consumer's rate could skyrocket — on all credit cards, not just the one that's been paid late, or for which the credit limit has been exceeded.

"If, in the judgment of the credit card issuer, anything on your credit report suggests higher risks in the future, they give themselves the right to completely change your contract — without your permission — even though your relationship with that company is pristine," said Joseph Ridout, consumer services manager with Consumer Action in San Francisco. "It is fundamentally unfair to the cardholder."

Changing at will

It is also perfectly legal. Credit card companies note that cardholder agreements generally give credit issuers the right to change the rates and terms at will. Most also say that a consumer who pays late a set number of times, or becomes more heavily indebted, can be shoved into a higher interest-rate tier.

Tiered rates, which have been around for more than a decade, are aimed at providing low-cost cards to the best credit risks while still offering credit — albeit at a higher price — to people with spotty credit histories.

"Credit card loans are the riskiest type of consumer lending that the industry does. Nine times out of 10, you earn the interest rate that you receive."

The problem, consumers say, is that the determination of when a person becomes a higher risk seems arbitrary. No one has statistics on how many consumers get rate increases each year, nor what the increases are based on.

However, Ridout said Consumer Action had been inundated this year with reports of unfair rate increases.

Many factors checked

There are several factors that can spur a sudden credit card interest rate increase, even when the consumer has an unblemished payment history, according to a recent Consumer Action survey of bank practices. They include a drop in the consumer's credit score, paying a car or mortgage loan late, going over the credit limit on any card, adding debt or getting additional credit cards.

Legislation proposed

The Consumer Credit Card Protection Act of 2005 would ban the raising of rates on pre-existing balances on fixed-rate cards and would require better disclosure of pending rate increases. Sen.
Christopher Dodd
, D-Conn., is sponsoring a similar bill.

"Congress has a responsibility to stop credit card companies from ripping off the middle class by using bait-and-switch tactics," Sanders said in a prepared statement.

Just switch companies

Regardless of whether the law is changed, consumers do have one viable option if faced with what they consider to be an arbitrary rate increase: close the account. Most credit companies will allow consumers to pay off loans, at the previously announced terms, if the consumer makes no further charges.

Meanwhile, Mills said, the industry remains hotly competitive, so good credit risks can easily object to policies they don't like by switching credit card companies.

"There are more than 6,000 credit card issuers," she said. "If you have a good credit rating, you've got lots of options. If you don't like what you've got, get another one."